Probi AB
STO:PROB
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Probi AB
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Welcome to Probi Q2 Report 2023. [Operator Instructions]
Now I will hand the conference over to CEO, Anita Johansen; and CFO, Henrik Lundkvist. Please go ahead.
Good morning. Welcome, and thank you for dialing in to Probi's presentation of our quarter 2 results for 2023. With me, I have Henrik Lundkvist, the CFO of Probi. And my name is Anita Johansen, I'm the CEO of Probi. Please take a few moments to familiarize yourself with this statement. And this is the agenda of our presentation today.
So in summary of our call today, I'm going to talk a little bit about the key highlights here. The net sales in the first half of 2023 decreased by 4%, which was actually 10% adjusted for the currency effects. And the result after the first half year is SEK 316 million. The EBITDA margin for the first half of the year decreased to 19% and it was burdened by large cost affecting the comparison, and Henrik will talk a little bit more about that later.
We saw a weaker underlying demand in Americas and in EMEA, which negatively impacted the sales. APAC region grew by 27% in the first 6 months, and especially Australia and China was leading the way there. Also in the APAC region, we had approval of HEAL9 strain in Thailand. And last year, we had approval of the HEAL19 strain in Thailand, which enables further expansion in APAC for our Osteo and Defendum concepts.
In this quarter also, we took over the distribution of our own brand, Probi, in Sweden by April 1, and we also entered into Norway with new agreements with pharmacies there. We also announced that by August 1, we will become the exclusive distributor of BLIS strains in the U.S. and in Canada. And also in this quarter, we announced a new partnership with Clasado Biosciences for the development of synbiotics products.
We experienced some inefficiencies in our manufacturing, and they have affected our results and the profitability negatively. We've initiated a remediation program and we have implemented new key performance indicators that are focused on quality and operational excellence. We've also temporarily increased our stock levels to ensure we are able to meet our customers' expectations.
In manufacturing and operations, we've reviewed ways of working, and we've strengthened our organization to support for clearer definition of roles and responsibilities and accountability. In our commercial function, our previous VP of Marketing and Sales has left the organization upon mutual agreement. And a recruitment for our new VP of Marketing and Sales is ongoing. Unfortunately also, our CFO has handed in his resignation and will leave Probi no later than the end of the year, and the recruitment has been initiated.
A little bit more about our business to consumer in Sweden and Norway. Probi chose to go directly to the Swedish market to become an even more important player in the Swedish probiotics category. And from April 1, we went live and will now distribute our own brand, Probi, in Sweden. We've organized ourselves with a small sales and marketing organization that is focused exclusively on the Swedish and Norwegian market.
In the first half of the year, the sales team has made personal calls with more than 650 of the largest self-care pharmacies. We've also signed agreements with leading pharmacy chains in Sweden and has initiated the expansion into Norway. Our ambition is to grow significantly in the coming years, and we have promotional activities planned for the remainder of the year. And we plan to further review our product portfolio and adding new relevant products for the Swedish and Norwegian customers.
Now I'll hand over to Henrik for a financial review.
Thank you, Anita. So I will walk you through the financials. So we reported net sales of SEK 144 million or a decline of 18% in the second quarter. Adjusted for currencies, that was down 21%. And for the first half of the year, we reported a decline of 4% or minus 10% adjusted for currencies. What we experienced is a weaker underlying market both in Americas and EMEA, which explains the sales decline.
The reported EBITDA was 9% in Q2 and 19% for the first 6 months of the year. The EBITDA margin was affected by inefficiencies in manufacturing, but also high cost affecting comparability that I will go through more in detail later in this presentation. Adjusted for this additional cost, EBITDA margin would be at 17% in the quarter and 23% for the first half of the year.
For the first 6 months of the year, Americas reported a growth of 1% or minus 7% currency adjusted. What we see in the -- is, in general, a cautious market where customers are ensuring they don't keep too high stock levels, which resulted in lower order frequency from some customers. We also see tendencies to a shift towards less premium priced products.
In region EMEA, we reported a decline of 36%, mainly related to a softening in the market. The sales in the region was also negatively affected by one of the largest customers that reduced their safety stocks. We temporarily had lower sales in the Swedish market during the first half of the year as we took over the distribution. We have limited shipments to the old distributor in Q1 as they were selling out their stock.
And in Q2, we also initially had lower sales as the pharmacy chains sold out their excess stock. In Q3, we expect normalized order patterns from the pharmacy chains again. In region APAC, we reported a very strong first 6 months of the year with a growth of 27%, and sales in the first half of the year was all-time high. Growth mainly came from Australia and China, and we continue to be optimistic about this region based on the healthy customer pipeline.
And regarding the gross margins for the different regions. In Region America, we -- it is lower due to the volumes and also the challenges we have in manufacturing. In EMEA, it's on the same level as last year. And in APAC, it's slightly higher compared to previous year based on the higher volumes.
And then a brief overview of our net income. So the lower net income was mainly explained by lower sales volumes, shown here as minus SEK 13 million, and the lower gross margin effect shown here as a minus SEK 12 million. In the quarter, there was also a large cost affecting the comparison of SEK 11 million.
So if we break down those SEK 11 million, we had SEK 5 million that was related to sales and marketing expenses, whereof SEK 2 million was related to restructuring costs and SEK 3 million was related to establishment costs in the Swedish market as we have invested in commercials, marketing campaigns, et cetera, in connection with the takeover of the distribution in Sweden.
The addition -- or the rest of the SEK 11 million was -- or SEK 6 million was connected to the challenges in manufacturing and the initiated remediation program. SEK 2 million was related to scrap materials that didn't meet our high-quality standards. The root cause has been identified and the issue is resolved around that.
SEK 2 million was buying external materials instead of making. We will continue to manage our buy versus make ratios during the period of the remediation program to ensure we can deliver to our customers' expectations. And the remaining SEK 2 million was related to consultants and other process costs connected to the remediation program.
Our operating expenses were in level with previous year. The financial result was better than last year due to the higher interest rate, and the tax was lower as a result of lower results. So the net income for the quarter was minus SEK 6 million.
And then some comments to the cash flow for the first 6 months of the year. The gross operating cash flow amounted to SEK 61 million. We had a negative cash flow effect from higher working capital by [ SEK 30 million ] due to higher accounts receivables and inventory. The inventory was partly increased as we have taken up the distribution in Sweden. But the remaining part is connected to the remediation program as we expect to keep a higher stock to ensure we can -- we will be able to meet the customers' expectations. Accounts receivable was higher as large shipments were made late in the quarter.
The paid tax has amounted to SEK 9 million. CapEx amounted to SEK 24 million. The largest part is related to investments in our manufacturing sites in the U.S., but we also continue to invest in clinical trials and IP. And in the quarter, in the second quarter, we paid a dividend of SEK 15 million to our shareholders. And the cash flow from financing activity is mainly related to payments and interest for lease obligation, which amounted to SEK 8 million for the first 6 months of the year.
So to summarize, we have a strong cash position of SEK 302 million at the end of the quarter. The cash has slightly decreased during the first half of the year, but this is also the period we paid dividends to our shareholders.
And then a brief overview of our balance sheet. It continues to be very strong and we have no external loans. The equity amounts to SEK 1.4 billion, with an equity ratio of 91%. It is good to have a strong balance sheet, especially under the current macroeconomic uncertainties. This enable us to further invest in new projects and capabilities to continue to build the growth platform.
So to summarize the financial review, the reported numbers for the first half of the year has been affected by a softer market in Americas and EMEA. The lower volumes, together with the challenges in manufacturing, has resulted in lower profitability. We expect our reported full year sales to be approximately in level with previous year. At the same time, we will continue to run the remediation program in manufacturing to ensure we can leverage from the investments we made.
We also need to continue to invest in our science and our commercial teams to further build the platform for further growth. This means we expect the profitability to be lower than previous year for the full year numbers.
By that, I will hand over to Anita again.
Thank you, Henrik. Our objectives and action plans for the rest of 2023 are clear. The route to success is to have a strong leadership team in place, and this is still my key priority. I'm pleased to now have a new VP of Manufacturing in place. I have also processes ongoing to replace Henrik as the CFO, and fulfilling the vacancies of VP of Marketing and Sales and VP of R&D.
Our key priority is to come back to growth and thereby increase our profitability. We have reviewed how we can become more efficient internally, enabling us to better meet the needs of consumers, our customers and our external stakeholders. We are focused on reaching commercial excellence, succeeding with the planned launches of new innovations and on gaining efficiencies in manufacturing.
Commercially, we are progressing nicely with taking home the distribution of our Probi brand in Sweden, and we've also indicated the distribution to pharmacies in Norway. We've made investments in our business to consumer, and we expect to realize the increased net sales in the coming quarters.
Also very important for us is to timely succeed with the launches of new concepts that will contribute to future growth. For BLIS strains that are manufactured by Probi, we are intensifying our marketing efforts while preparing to become the sole distributor of K12 and M18 in North America from August 1. We are preparing new launches to come later in the year in the mental health area and in the area of synbiotics. In manufacturing, we have now created a manufacturing remediation program with clear action plans and targets, and we see significant improvement already.
To conclude on this presentation, Probi is having a tough year and we are facing some headwinds. However, we have no doubt that we are on track to come back to growth. We have the right products in place and our pipeline is backed by significant science, which is ensuring the benefit to consumers' [ lives ]. Now we are working through changed market dynamics simultaneously with internal hurdles. But we know what we need to do, and we are firmly set to execute on our plans.
With that, I want to hand over to questions. So please open up for questions.
[Operator Instructions] The next question comes from Gonzalo Artiach from ABG Sundal Collier.
The first one is related to your manufacturing problems. Could you elaborate a bit more about that? What is the actual problem and when did you start experiencing this problem? And also how long is it going to take to fix it? I mean maybe you said, Henrik, I think that the problem is already fixed.
Thank you, Gonzalo, for the question. I'll try to answer as well as I can. So basically, we are looking to optimize processes and gain efficiencies in all areas of manufacturing. We have implemented the key KPIs on quality and operational excellence, and we've reorganized our organization to ensure that there's clarity in responsibilities and accountability. So what is basically how we've organized ourselves, and we can be a lot better and becoming more efficient in what we do and to do it at the right time and in the right quality.
So when, the remediation program will be the key focus for the remainder of 2023, and we expect the results to be realizing gradual improvements in efficiencies during next year. So it's not something that will be fixed in one day and then the next day it's over. So it will be a gradual improvement, but we expect to see already effects this year and especially next year.
Okay. Second question is, I mean, you're mentioning that in the Americas and EMEA, you see a weaker underlying market, less inventory levels and lower order frequency, but how do you see this developing in the near midterm? And also specifically in EMEA, you mentioned order delays, how big is the impact of this? And also can we expect this to be -- I mean, the delays to be moved to Q3?
So I can answer the one, EMEA, we'll start with that one. So when it comes to the order delays, there are 2 types of business in EMEA now with the new B2C business. So we kind of need to separate them. Looking at the B2C business in Sweden, we have had during, well, the internalization or integration of that piece, we knew that we were going to, short term, suffer a bit of not having orders.
The old distributor needed to cycle out their inventories, and the pharmacies, they obviously built up some inventories as they were cycling out -- as the distributor was cycling out things. This we expect now to more or less be over, and we expect more normalized order patterns during Q3 and Q4. So we should see some good growth from that business during the second half of the year.
When it comes to the more traditional business-to-business business, that is where we see this softening, where we have many premium brands in the market -- or our customers have many premium brands in the market, where we then see a bit of a softening and the customers not placing orders as frequent as in the past. So short term, we don't really see that, that will improve a lot. So I think -- but that should, however, be then compensated by the business to consumer.
Okay. Yes. Great. And then...
And maybe I can flesh out that one. It's -- and I think the same answer actually goes for region Americas. When it comes to customers, we are not losing any customers, but we see, in general, that the customers are ordering lower volumes compared to previous year.
Okay. All right. And one final question, if I can. Could you give us some color on the new collaboration with Clasado Biosciences? I guess the goal is to combine, in the end, pro and prebiotics. But what is the development plan here? And when do you expect to have a product ready together with them?
Thank you very much. I'll answer that. Yes, so right now, we have announced that we are entering into a partnership, and we are exploring basically how we can utilize the very strong portfolios we have. So of course, Probi, you know that we have a lot of strains that are scientifically documented in clinical studies. And Clasado has a prebiotic that they also have significant clinical science on. And so just having those 2 individual ingredients, that basically speaks for a combination, and then you would get what would be described as a complementary synbiotics.
However, we are doing -- we have ongoing preclinical studies to hopefully give us a proof of concept, and we are ready to go live very soon. As I said earlier, by the end of this year, we will open up to discuss with our customers.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you. So the last slide basically shows our next call in our financial calendar. We will have a new call for the interim report of Q3 on October 24, and then the year-end report for the entire year will be presented on January 26 next year.
With that, I will now conclude the call and say thank you for your attendance and for your questions, and have a nice day. Thank you.